Commonwealth Bank of Australia - Understanding Organisations

The theories of organizational management have developed over time and have been used to evaluate an organization’s overall core structure, behavior and how the organization is managed. In this paper, we will be focusing on two theories agency theory and cultural organization to help evaluate Commonwealth Bank of Australia as an organization through an organizational management lens. Miles (2012) explores agency theory and defines it as agents within an organization hired by principals under any form of contract to achieve set goals and outcomes with an authority to make decisions. The other theory this paper will be exploring is contingency theory which explores how there is no exact one method to manage and organization but requires the adaption and reaction of all relevant stakeholders within an organization to operate the core business values. Commonwealth Bank of Australia (CBA) the focus on the organization will explore the development of these two theories and help evaluate the organization. Commbank one of the ASX leaders have experienced its fair share of success and recent failures in the automatic telling machines provide the paper with the opportunity to evaluate these theories.

Introduction to Commonwealth Bank of Australia

Commonwealth Bank of Australia is Australia’s leading financial institution. Commonwealth Bank offers a variety of personal, business banking and investment services that provide everyday banking accounts, investment options, superannuation, loans, and insurance. Commbank has a group vision to excel at securing and enhancing the financial well-being of people, businesses, and communities (Commonwealth Bank 2017). According to Commonwealth Bank 2017 annual report, there are currently 51,800 diversified staff members and over 800,000 shareholders. The organization is ranked first in retail customer satisfaction and also equally placed first in business customer satisfaction. CBA is the Australia’s largest company by market capitalization and leads the way in technological innovation. The organization aims to increase its global presence and culture score to become the top-ranked in the banking industry. The company’s vision is to further the competitive advantage it currently has over the other Big 4 banks in Australia.

With over a century of industry experience, CBA has had both its successes and share of failures. This year, CBA has faced allegations of systematic reporting to the governing body in regards to $10,000 and above deposit reporting system which has caused a class legal action in shareholders suing the bank for negligence and the fall in their share’s value. Despite this recent setback, CBA is still performing at a high level of success that is respected due to their annual report figures.

The paper discusses the how the application of agency theory and contingency theory have been chosen to analyze the organization through a theoretical lens to help evaluate the success and failures of Australia’s biggest company. Miles (2012) states the agency theory is the focus on the principal and agent relationship. Eisenhardt (1989) discusses how the conflicting relationship between the principal and agent, and the problem in diversifying risk extend the relationship to other stakeholders such as the shareholders and management.

Agency Theory & Contingency theory studies with seminal papers

In this essay, I will be summarising seminal papers to develop an understanding of contingency theory along with agency theory and apply the lens to Commonwealth Bank to illustrate the importance and limitations of these theories. The two seminal papers on Agency theory will be Shapiro (2005) and Eisenhardt (1989) to illustrate Commonwealth Bank’s current corporate structure and responsibility.

The agency theory model was established in the early 1970s describes the relationship between two parties. The first entity is the agent who is hired by another entity called the principal. The agent-principal relationship is a methodology used to create a contractual agreement that outlines the tasks an agent will perform on behalf of the principal and be fairly compensated. Shapiro’s take on agency theory has played a dominant role in identifying how this theory has seeped into organizational management and literature. With business continuously evolving to meet today’s standards adaptation of organizational policies are required to help align line manager’s behavior and incentives these individuals to help avoid disrupting the agency relationship (Shapiro 2005).

There are two key issues that can occur in an agency relationship. Risk sharing arises when both the principal and agent have two different risk preferences in the choices made. The other is the agency problem where either principal or agent both seek to maximize their own self-interest the agent would generally perform at a lower level. Dalton et al (2007) identifies three main ways that we are able to minimise these agency problems by delivering efficient contract through board independence, the market for corporate control and agent equity ownership. The implementation of a board of independence allows the organization to focus on their areas of specialization like Commonwealth Bank focusing on banking, the board who are independent of the organization are able to make informed decisions outside of the organization to minimize the amount of self-interest.

Eisenhardt (1989) reviews agency theory unit of measure as the contract that governs the relationship between the principal and the agent. Research suggests that the principal-agency theory displays rationality of the individual within a certain limitation are self-interested and avoid risk to achieve the optimal outcome based contract. The research branches off into two sets of agency theory the first being positivist agency theory and the other principal-agent theory. Positivist agency focuses on the identification of the situation where the principal and agent desire different outcomes. Principal-agent theory establishes the organization's governance mechanisms that control and regulate the differences between the principal and agent to reduce the self-serving behavior.

Miles (2012) describes structural contingency theory the appropriate application of organizational structure depends on the contingencies that are being faced by the organization. Donaldson (2001) identifies how organizational characteristics have to be aligned with the contingencies in order to perform in a more effective environment. Contingency theory argues that without the correct structure implemented organizations cannot achieve optimal levels of effectiveness. The theory focuses in depth on the structure